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CASE STUDY

CASE STUDY. Case study – applicability of sch.vi. The financial year of RPJ Ltd. is calendar year i.e. Jan-Dec every year. Explain when Rev. Sch. VI will be required to be applied by the company. ANSWER –

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CASE STUDY

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  1. CASE STUDY

  2. Case study – applicability of sch.vi The financial year of RPJ Ltd. is calendar year i.e. Jan-Dec every year. Explain when Rev. Sch. VI will be required to be applied by the company. ANSWER – Revised Schedule VI shall apply for the Balance Sheet and Profit and Loss Account to be prepared for the “financial year commencing on or after 1.4.2011” Therefore Rev. Sch. VI to be applied from FY 2012 i.e. Jan-Dec 2012 and not Jan-Dec 2011 since early application of the same is not permitted.

  3. Case study – share capital • Mr. OVS is a shareholder of GS Co Ltd. During the year he purchased some shares of GS Co Ltd which elevated his share holding to more than 5%. He subsequently sold the shares resulting dilution in his holding. He holds 4% equity shares of the company as on the balance sheet date. Whether the company is required to disclose the shareholding of Mr.OVS as on the balance sheet date under Revised schedule VI? How would your opinion differ if he also holds 2% preference shares as on the balance sheet date? • ANSWER • Revised schedule VI does not indicate the date of holdings. • Guidance Note of ICAI – Consider the holdings as on last day of the financial year. • Therefore, if Mr.OVS holds more than 5% during the financial year but not as much on the balance sheet date the disclosure is not required. • The condition of holding shall apply to each class of shares independently. • Therefore no disclosure required for preference capital of 2% also.

  4. Case study – share application • X ltd has Rs.50 crores as issued, subscribed and paid-up capital. The company has Rs.100 crores of authorized capital. The company has made an issue of capital through private placement of Rs.20 crores on 15th March 2012. However, the company has received Rs.30 crores as share application money from applicants and as on 31st March the share capital is yet to be allotted. Discuss how the same will be disclosed under the requirements of revised schedule VI? • ANSWER • Share application money < issued capital only to be disclosed below share capital. • Rs.20 crores = issued capital is disclosed as “Share Application Money pending allotment” (separate line item on face of BS) • Excess Rs.10 crores recd. beyond issued capital is a Current Liability  Other current liability.

  5. Case study – share application • X ltd came out with an IPO in March 2012 of Rs.50 crores. The closing date of receipt of share application money from the applicants was fixed at 25th March 2012. On the closing date, only 20% of the issue was subscribed which was less than the minimum subscription prescribed. Discuss how the share application money collected will be disclosed under Rev. Sch.VI. • ANSWER • Share application money < Min. subscription is liable to be refunded. • Company does not have unconditional right to defer settlement beyond 12 months from BS date. • Reflect the entire amount of Rs.10 crores (20% of Rs.50 cr) as a current liability.

  6. CASE STUDY – current assets • Company XYZ Ltd. produces aviation spares. • The time taken from initial purchase of raw materials till the completion of final production of the spares and delivery thereof after quality certification is on an average 10 months. • Once the sales are concluded to the buyer, normal credit terms provide for payment of the dues within 6 months from date of delivery. • One of the spare parts produced are not much in demand and have been lying in inventory since past 2 years. The management does not expect the same to be disposed of in the near future also. • Explain how the company will reflect the inventory and trade receivables in the balance sheet.

  7. CASE STUDY - ANSWER • Normal operating cycle = 10 months + 6 months (time for procurement of inputs for processing and ultimate realisation in cash of the finished product). • As per definition of current assets – all inventory will be classified as current since it is realised within operating cycle. (though some of it will not be realised within 12 months from BS date) • Trade receivables – expected to be realised within normal operating cycle. So classified as a current asset  Trade receivables.

  8. CASE STUDY – current liabilities • Y Ltd has FCCBs worth Rs.100 crore which are due to mature on 31st December 2012. While preparing the financial statements for the year ending 31 March 2012, it is expected that the FCCB holders will not exercise the option of converting the same to equity shares. How should the company classify the FCCB on 31st March 2012? Will your answer be different if the company expects that FCCB holders will convert their holding into equity shares of Y Ltd? • ANSWER • Terms of a liability resulting in settlement in equity will not affect classification if option is with counterparty. • Expectation of company has no relevance in classification. • Therefore in both cases, Y Ltd should classify the FCCBs as current liabilities on 31stMarch 2012.

  9. CASE STUDY – borrowings • EFG Ltd. has taken a 7 year term loan from bank against security of plant & machinery. 3 years of the loan are over as on 1st April 2011 and opening balance of the loan is Rs.5.50 crores. • The principal repayment per year is approx. Rs.2 crores. But last 2 months installments are unpaid as of 31st March 2012. • As per terms, loan would be liable to be recalled in case of failure to adhere to loan terms which include submission of quarterly performance indicators. • During 2011-2012, EFG Ltd. did not submit any statements, but bank has not issued any notice for recalling the loan. • Explain how the loan would be disclosed as per Rev. Sch. VI.

  10. CASE STUDY – answer • Term loan is basically a non-current liability. However, in case terms of the loan are violated then the loan becomes repayable on demand. • Demand loans form part of Current Liability. But based on past experience, in case of such small defaults, bank never recalls the loan. • So classification as at reporting date – Non-current Liabilities  Long term borrowings. Disclose the nature of security as plant & machinery. Also disclose the continuing default in repayment only (not required for other covenants) • NOTE – Current portion of the loan i.e. Rs.2 crores payable in 2012-2013 is a Current Liability  Other current liabilities.

  11. CASE STUDY – borrowings • In the above case, would the disclosure change if, and how: • The Bank serves a recall notice on 15th March 2012. • The Bank serves a recall notice on 24th April 2012 and the BSPL are adopted by the Board on 19th April 2012. • The Bank serves a recall notice on 19thApril 2012 and the BSPL are adopted by the Board on 24th April 2012. • ANSWER • The loan becomes a demand loan. Will be classified as Current Liability. However, for previous year, continue in non-current. • Notice is not received before accounts are signed. Answer remain same as previous slide – non-current liability. • Default is during the year. Notice is served after BS date but before signing accounts. As per AS-4, reflect in Current Liability.

  12. CASE STUDY – employee benefits • PQR Ltd. has defined benefit gratuity plans funded by a trust. As at 31st March 2012, it has 65 employees. • As per actuarial assumptions, attrition rate is 2% and around 4 employees are reaching retirement age during 2012-2013. • Total accumulated casual leaves which can be availed within 180 days from the end of the year = 1500  valued at Rs.25 lakhs. • Gratuity portion amounting to employees excepted to leave = Rs.2.50 crores as provided by actuary. • Bonus for the year 2011-2012 payable to the employees during June of next year = Rs.20 lakhs. • Explain how the above components of employee liabilities would be disclosed under Rev. Sch. VI.

  13. CASE STUDY – answer • Bonus for the year 2011-2012, Rs.20 lakhs already accrued and is therefore classified as Current Liability  Other current liabilities. • Short term compensated absences valued at Rs.25 lakhs – employees have already earned the right to take leaves. Therefore classified as Current Liability  Other current liabilities. • Gratuity liability valued actuarially is usually a long term benefit as per AS-15. Presentation as per Rev. Sch. VI is to be split between current and non-current portion. • Gratuity payable to employees expected to leave during next 12 months – Current Liabilities  Short Term Provisions • Gratuity payable to others – Non-Current Liabilities  Long Term Provisions.

  14. Case study - deposits • Z Ltd. is an automobile manufacturer. It has various retail outlets across the country which are managed by authorised dealers. • As per policy of the company, it requires the dealers to give a dealer deposit of Rs.1.00 crore per dealer. As on 31st March 2011, there are 27 dealers across the country and a deposit of Rs.27 crores is collected from them. • Due to lower sales, the company decides on 18th Feb 2012 to terminate the dealership of 4 dealers and intimates them its decision to do so. • As per dealership agreement, deposits are repayable within 90 days from termination by either parties subject to settlement of all dues. • Of the 4 dealers terminated, 1 dealer has filed a suit in the Court against this action. The company expects that it will be a long drawn Court case. • Explain how the deposits will be reflected in the Bal. Sheet of Z Ltd. as on 31st March 2012 as per Rev. Sch. VI.

  15. Case study - answer • 3 terminated dealers are entitled to get their deposits refunded within 90 days from the date of termination of 18th Feb. i.e. 17th May 2012. Since the company does not have unconditional right to defer settlement beyond 12 months from the BS date, Rs. 3 crores will be reflected as Current Liability  Short term borrowings  Deposits. • Out of 4 dealers terminated, repayment of Rs.1 crore is not expected to happen within 12 months from BS date since the matter is in Court. Therefore Rs.1 crore will form part of Non-current liability  Long term borrowings. • Rest Rs.23 crores will also be a part of Non-current liability  Long term borrowings.

  16. CASE STUDY – trade payables • HPK Ltd. has purchased during the year 2011-2012 raw materials worth Rs.7.50 crores on credit and payment is outstanding amounting to Rs.5.50 crores. • Of above, an amount of Rs.0.75 crores is payable to suppliers registered under the MSME Act as small enterprises. • It has also purchased fixed assets amounting to Rs.10 crores for which payment is yet to be made to the supplier. • Interest on loans accrued = Rs.0.10 crores and TDS payable = Rs.0.25 crores. • All the amounts are payable within 12 months from the reporting date. Till March 2011, all the above formed part of Sundry Creditors. • Explain the disclosure requirements as per Rev. Sch. VI.

  17. CASE STUDY – answer • Under Rev. Sch. VI, sundry creditors replaced with Trade Payables. “Trade payables” = amount due on account of goods purchased or services received in the normal course of business. • Rs.5.50 crores of creditors for raw materials are only Trade payables. Creditors for fixed assets (Rs.10 crores), Accrued interest on loans (Rs.0.10 crores) and TDS payable (Rs.0.25 crores) are Current liabilities  Other Current liabilities. • MSMED Act 2006 requires disclosure of debts due to MSME creditors. Disclose as follows in Current Liabilities Trade payables:

  18. Case study – fixed assets • MNT Ltd. has commenced construction of its own factory building and as per a certificate from its architect and chartered engineer, as on 31st March 2012 construction is complete to the extent of 66% amounting to Rs.12 crores. • It has also ordered for specialised equipment with a value of Rs.1 crore for which advance payment has been made on 23rd March 2012 and delivery and installation is expected to be complete by 10th April 2012. • The present factory building is not being used by MNT Ltd. and is given on operating lease to TRP Ltd. for a 5 year term. • The administrative office building is taken on a 60 year lease which qualifies as a finance lease. • Explain how the above would be disclosed in the BSPL of MNT Ltd.

  19. Case study – answer • Factory building forming part of buildings is a tangible fixed asset. However, it is partially complete upto 66%. Disclosed as Fixed Asset  Capital Work-in-progress. • Advances given for purchase of machinery no longer qualify as Capital WIP as unlike old Sch. VI. Therefore Rs.1 crore forms part of Non-Current Assets  Long Term Loans and Advances  Capital Advances. • Assets under lease are to be shown separately – Includes those taken on finance lease and those given on operating lease. • Therefore under tangible assets, disclose both – • Admin building (taken on finance lease) • Factory building (given on operating lease)

  20. Case study - investments • XYZ Ltd., an oil extraction company has the following investments in its portfolio as on 31st March 2012. The company purchases all the investments with a view of holding it for long term. • Debentures of R Ltd. – Rs.1.00 crores redeemable on 31st March 2020. • Listed Equity shares of G Ltd. – Rs.0.35 crores, MV – Rs.0.38 crores. • Listed NCDs of X Ltd. purchased on 15th June 2011 – Rs.2 crores, redeemable 50% on 14th June 2012 and balance on 14th June 2013. Market value on 31st March 2012 is Rs.1.85 crores. • Investment in the equity capital of Z Ltd., a subsidiary – Rs.5 crores. • In addition to the above, it also has a plot of land acquired in 1984 for Rs.0.25 crores which is neither intended to be used for the operations of XYZ Ltd nor intended to be sold immediately, but to be held in the long term for capital appreciation. • Explain how the above would be disclosed under Rev. Sch. VI.

  21. Case study - answer • Investment classification is decided under AS-13. Rev. Sch. VI only deals with presentation aspects. Since all investments are to be held for long term. AS-13 valuation principles will apply. • Presentation will be as per liquidity as follows: • Debentures of R Ltd. – Non-current assets Non-current Investments. • Shares of G Ltd. – Non-current assets Non-current Investments • NCDs of X Ltd. – Rs.1 crore redeemable within 12 months from BS date – Current Assets  Current Investments  Others • NCDs of X Ltd. – Rs.1 crore redeemable beyond 12 months from BS date – Non-Current Assets  Non-Current Investments. • Market value in both the cases to be disclosed. • Investment in Z Ltd.,– Rs.5 crores – Non-current Non-Current Investments Trade Investments. Disclose details of subsidiary. • Investment in land for capital appreciation is investment property as per AS-13 - Non-current assets Non-current Investments.

  22. Case study – trade receivables • ABC Ltd. manufactures and supplies polymers and rexins required in various industries as raw materials. • The customers of ABC Ltd. include certain overseas parties. Normal credit period allowed to the overseas buyers is 180 days. • On 22nd March 2012, sales equivalent to USD 25,000 are made to KLM Plc. In UK. Due to regulatory sanctions, KLM Plc is restricted from remitting funds outside UK till 30th Sept. 2013. • Explain how Trade receivables will be reflected in BS of ABC Ltd. for 31st March 2012.

  23. Case study – answer • Normal credit period for overseas customers is 180 days. • All Trade receivables expected to be realised within 12 months from BS date should be reflected as current. • It is known that KLM Plc. Will not be realised within 12 months from BS date. • Out of total trade receivables, equivalent of USD 25000 will be classified as non-current and the rest will be classified as current.

  24. Case study – trade receivables • Discuss how the below mentioned data would be disclosed under Old and Revised Schedule VI

  25. Case study – answer • Debtors under Old Schedule VI classified as > and < 6 months on bill date basis. • Trade receivables under Rev. Sch. VI classified as > and < 6 months on due date basis. (Important: Last year’s data needs to be reclassified) • Accordingly presentation is as under:

  26. CASE study – cash & cash Equivalent • D Ltd. has the following cash and bank balances. Explain how these will be disclosed in the BSPL for 2011-2012 as per Rev. Sch. VI. • Cash on hand – Rs.0.03 crores • Balances with scheduled bank in current account – Rs.2.45 crores • Balances with non-scheduled bank in current account – Rs.1.64 crores • Rupee converted balance in EEFC account – Rs.6.80 crores • Term deposits of banks – Rs.3.75 crores (Rs.1 crore maturing on 30th June 2013) • Unpaid dividend account of 2010-2011 – Rs.0.45 crores. • Of the above, FDs worth Rs.0.75 crores are placed as margin money for bank guarantees. The EEFC account has been placed under restriction from RBI. • In addition D Ltd. also holds some highly liquid money market instruments which can be realised anytime within 3 months.

  27. CASE study – answer • “Cash Equivalent” = short term highly liquid investments readily convertible into “known amount of cash” and are subject to insignificant risk of changes in vaIue. • Money market invt., highly liquid – Yes, but convertible into known amounts of cash – No. Therefore not a cash equivalent.

  28. Example - OTHER commitments

  29. Case study - revenues • XYZ Ltd. a company engaged in the manufacture and sale of automobiles has the following revenues during the year: • Sale of vehicles – Rs.200 crores • Sale of vehicle spares – Rs.45 crores • Revenue from servicing – Rs.15 crores • Interest on fixed deposits – Rs.2 crores • Rental income from let out property – Rs.6 crores • Dividend on investment – Rs.0.50 crores • Sale of scrap – Rs.0.12 crores. • Profit on sale of property – Rs.1.50 crores • Explain how the revenues will be reflected under Rev. Sch. VI.

  30. Case study - answer

  31. Finance company - illustration

  32. CASE STUDY – revenues XYZ Ltd. a company engaged in the manufacture and sale of textiles also has one real estate arm, which is in the business of giving real estate properties on lease. Rent income from the leasing of the assets is to be classified as --- ???? XYZ Ltd. a textile company owns a 10 floor building. It does not require one floor and so gives it on rent. Rent income from the leasing of the single floor in the 10 floor building is to be classified as --- ???? This income arises from operating activity, though secondary. Therefore it is a part of Operating revenues. This income arises incidentally, not from operating activity, Therefore it is a part of Other Income.

  33. Case study – finance cost • BCD Ltd. is involved in laying of transmission lines for various power companies. It has the following borrowing related costs during the year 2011-2012. Show how these will be disclosed under Revised Schedule VI. • Interest on term loans from banks – Rs.6.50 crores • Processing fees for the term loans – Rs.1.00 crore • Commitment fee for non utilisation of CC limits – Rs.0.25 crores • Implicit finance charge on leased assets – Rs.2.00 crores • Upfront commission for bank guarantee – Rs.0.50 crores • Interest on debentures issued – Rs.3.00 crores • Interest on USD loan taken for construction of specialised equipment (a qualifying asset) – Rs.7.50 crores. Of the above, Rs.7.25 crores is eligible for capitalisation as per AS-16. • Exchange loss not eligible for capitalisation – Rs.0.35 crores

  34. Case study – answer

  35. Case study – items in p&L • PQR Ltd. has earned a total revenue from operations of Rs.120 crores. It has the following ledger heads in its trial balance: • Rent paid – Rs.6.00 crores • Insurance of factory building – Rs.0.75 crores • Internal audit fees – Rs.0.10 crores • Legal fees – Rs.0.50 crores • Power and fuel – Rs.1.25 crores • ISO certification fee – Rs.0.25 crores • Property tax paid – Rs.0.60 crores. • Travelling & conveyance – Rs.1.40 crores • Income tax penalty – Rs.0.50 lakhs • Explain how these items will be disclosed in the statement of profit and loss for 2011-2012.

  36. Case study – answer • As per Note 5(vi) of Rev. Sch. VI, following items will be disclosed separately in the statement of P&L irrespective of quantum - • Rent paid – Rs.6.00 crores • Insurance of factory building – Rs.0.75 crores • Power and fuel – Rs.1.25 crores • Property tax paid – Rs.0.60 crores • For rest of the items separate disclosure for items exceeding Rs.1.20 crores is required (higher of Rs.1 lakh and Rs.1.20 crore). Accordingly, travelling & conveyance, Rs.1.40 crores is separately disclosed. • Internal audit fees – Rs.0.10 crores, Legal fees – Rs.0.50 crores and ISO certification fee – Rs.0.25 crores can be clubbed under Other Expenses since below threshold. • Income tax penalty – not meeting the threshold, but can qualify as an extraordinary / exceptional item - required to be disclosed separately as per materiality.

  37. Case study – P&L presentation • VC Ltd. has incurred the following expenses during the year 2011-2012. show how these will be presented in the statement of P&L for the year 2011-2012 • As a result of a long drawn wage settlement and revision negotiations, the company has agreed to grant a wage hike of 7% every year retrospectively from 01.04.2009 and the cumulative impact of the said negotiations amounts to Rs.17 crores payable before June 2012. • 5 employees had retired during the year 2010-2011. Due to their long association with the company, the management granted an ex-gratia bonus of Rs.2 crores during March 2011. However, the same was accounted for during 2011-2012 when the payment was actually made. • There was huge damage to property due to earthquake. This had to be expensed out by Rs.1.75 crores. No insurance was available. • An old office building was sold for a profit of Rs.5 crores.

  38. Case study – answer The ex-gratia amounts to a prior period item since it was omitted from being provided during 2010-2011. The same will be included in the employee expenses but separately disclosed in Notes as a prior period item. Disclosure on the face of P&L is not mandatory as per Rev. Sch. VI.

  39. Case study - dividend • The Board of A Ltd. has proposed a dividend for the year 2011-2012 on 18th April 2012, of Rs.5 per share totalling to Rs.10 crores. Its subsidiary has also proposed a dividend of Rs.2 per share and A Ltd. holds 50 lakh shares. How will these items be disclosed in the BSPL of A Ltd. • ANSWER – • No requirement in Rev. Sch VI to provide for proposed div. AS-4 will override, provision for proposed div. will be made in the books as on 31st March 2012. Disclose as appropriations under Reserves & Surplus and also as current Liability  Short Term Provision • In old Sch. VI, dividends from subsidiary – accounted in the same year. This requirement is dispensed with in Rev. Sch. VI. So AS-9 will apply. • Dividend from subsidiary will be recognised when right to receive div. is established i.e. in AGM of subsidiary in 2012-2013. • Disclose change in accounting policy as a result of this amendment and quantify the impact.

  40. Case study – other information During FY 2011-12, X Ltd imported raw material costing Euro 25000 from Germany for manufacturing rubber tubes. Freight and insurance incurred till the goods are received at Indian customs area was INR 2.50 lakhs. The payment to the exporter is to be made in EURO. The rate persisting on the date of purchase was Euro 1 = INR 70. During the year, X Ltd also exported goods worth USD 9000 on CIF basis which includes freight and insurance upto the destination of USD 200. For export 1 USD = Rs.52. Discuss disclosure requirement as per revised schedule VI. If these goods are purchased by the company from a supplier in India who has imported such goods from abroad then whether it will affect the disclosure requirement for X Ltd.?

  41. Case study – answer • The CIF value of import is the cost plus freight and insurance associated with the goods imported. • Cost of imports = Euro 25000 X Rs.70 = Rs.17.50 lakhs • Insurance + freight = Rs.2.50 lakhs • CIF Value of imports = Rs.20 lakhs (disclosed in INR in Notes to accounts) • CIF value of goods exported = USD 9000 X Rs.52 = Rs.4.68 lakhs • Freight & Insurance = USD 200 X Rs.52 = Rs. 0.10 lakhs • Disclosure is required for FOB Value of Exports • FOB Value = CIF Value (Rs.4.68 lakhs) – Freight & Insurance (0.10 lakhs) • FOB Value of Exports = Rs.4.58 lakhs (disclosed in INR in Notes to Accounts)

  42. DISCLOSURES NO LONGER REQUIRED • Disclosures relating to managerial remuneration and computation of net profits for calculation of commission • Information relating to licensed capacity, installed capacity and actual production • Information on investments purchased and sold during the year • Investments, sundry debtors and loans & advances pertaining to companies under the same management • Maximum amounts due on account of loans and advances from directors or officers of the company • Commission, brokerage and non-trade discounts

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